A PERIODIC JOURNAL CONTAINING ITEMS OF INTEREST FROM THE WORLD OF DIRECTORS & OFFICERS LIABILITY, WITH OCCASIONAL COMMENTARY

The Day College Football Produced a D&O Story

Our beat here at The D&O Diary is basically restricted the world of directors’ and officers’ liability. So, regrettably, we don’t often have the occasion to write about college football. But a story making the rounds on the Internet manages to connect Colonial Bank (the third largest bank to fail during the current bank failure wave) and the evolving pay-to-play scandal surrounding Auburn University quarterback and Heisman candidate Cam Newton. So we felt empowered to write a post about it.

From the moment the Montgomery, Alabama bank closed in August 2009, observers have been asking what the bank failure might mean for Auburn football. As noted at the time on Time Magazine’s Curious Capitalist blog (here), Colonial’s founder, CEO and Chairman, Bobby Louder was also "the dominant force at Auburn University since George Wallace appointed him to [Auburn’s] board of trustees in 1983." ESPN.com called Louder "The Most Powerful Booster in College Football."

Many readers undoubtedly are aware that the news wires have been buzzing recently with stories about how Cam Newton’s father allegedly demanded payment from Mississippi State in order for Cam Newton to play there coming out of junior college. Since Newton did not wind up attending Mississippi State, but does play for Auburn, many have questioned whether or not there may have been similar payment demands at Auburn.

The lines of the Colonial Bank and the Cam Newton stories have started to cross, at least on the Internet. At least according to stories making the rounds online, the government authority’s investigation of circumstances surrounding the collapse of Colonial Bank has led to the discovery of information suggesting the possibility of payments made in order for Newton to play at Auburn.

I have linked in the next paragraph to a site that contains an exhaustive summary of the various details of this story that are available on the Internet. I would like to emphasize that in linking to this site, I am in no way indicating that I necessarily think any of the information on the site is true. The web site’s host himself indicates that he has not verified any of the information. The newsworthiness of these unproven allegations consists of the fact that these allegations are being raised, in that they suggest how far reaching the investigation into a bank’s failure potentially may spread. (Besides, as I noted at the outset, they involve college football, which is another reason I am writing about them here)

With all disclaimers duly noted, the site, which can be found here, makes for some awfully interested reading and I would suggest making some time to read all the way through the page. The page is assembled rather awkwardly and you will have to scroll down multiple times. Special thanks to a loyal reader for forwarding me the link to the site.

While we cannot now know what among the various things asserted on this site are factual, I would have to say that it would hardly come as a surprise that there might be some sort of a governmental investigation in connection with the collapse of Colonial Bank. Colonial Bank had assets of $25 billion, making its closure the third largest failure in the current wave of failed banks. Its failure caused a $2.8 billion loss to the FDIC insurance fund. Given the numbers involved, an investigation seems probable.

In addition, one of the former directors of Colonial, Milton McGregor, also a prominent casino owner and a prominent Auburn football booster, was recently arrested in Alabama in connection with a vote buying scandal that followed FBI wiretaps. The inflammatory question is whether or not the wiretaps divulged anything about payments to Cam Newton. There are news articles denying that the wire taps revealed anything about Cam Newton. However, it does seem clear that for whatever reason the FBI is involved in investigating the Cam Newton allegations.

A couple of observations, one D&O related and one not. On the D&O side, the information on the linked site (even if ultimately unproven) potentially could implicate at least two D&O insurance policies, the policy for Colonial and the policy of the Auburn University Board of Trustees. (Please note that I am not expressing an opinion here whether or not anything on the Internet constitutes a claim under any policy or even constitutes circumstances that might give rise to a claim)

Because of the significant overlap in membership between the two boards, there are at least a couple of complicated insurance questions. One has to do with the capacity in which the various individuals were acting in connection with the various misconduct alleged, as the capacities seemed to have overlapped in many important ways.

The other insurance problem is, well, an other insurance problem. The "other insurance" clause in each of the policies could lead to some roundabout analysis between the two policies.

I will reserve for another day (and perhaps another blog site entirely) my views about the insanity of a system in which college football players, who risk potentially crippling injuries and whose athletic displays produce billions of dollars of economic activity, are deprived of any financial benefit for their efforts. This grotesque system inevitably leads to scandals like the current one involving Cam Newton.

And Now From Our Vietnam Bureau: Under the heading of things we did not really expect to find ourselves writing about, we also note that Bloomberg news reports (here) that regulators in Vietnam have brought there first securities enforcement action, accusing a pharmaceutical company official of stock price manipulation. Apparently regulators and market participants around the world recognize the need to maintain marketplace integrity.

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